Critics of the Lloyd's of London insurance marketplace say it
has been undermined by modern means of communication. What special value
is there, they reason, in a broker being able to visit a multitude of
underwriters all housed in the same building? He can instead sit
tranquilly in his own office and negotiate face to face with them
through video display terminals.

The argument is a strong one, but there are other considerations.
While in theory we all publicly welcome the boom in electronic
networking and the increasing computerization of the insurance business,
in practice underwriters and brokers evidently still favor the arcane and antiquated business tradition of meeting face to face. Thus, not
only is Lloyd's optimistically planning for its future expansion,
despite today's electronic wizardry, but there is an eager
acceptance by London insurance companies of the concept of yet another
centralized insurance marketplace, an insurance and reinsurance bourse.

Perhaps it is a benefit of change that even if London market
practice is not greatly modified by technological advance, at least
critics will not be able to point to an outdated infrastructure. So, the
London market continues to transform its business structures while
hankering after the old ways.

As to the future of Lloyd's, computer and communications
technology has reached the point where it is possible to dispense with the paperwork for many transactions. Also, now most Lloyd's
underwriters and brokers are members of an electronic networking system
called Limnet, whose aim is the reduction of costs and improvement of
service through the use of the most modern technology. The scope of
Limnet, an IBM-based system already being used for electronic mail,
inquiries on data bases, accounting and claims settlement, is not
bounded by the Lloyd's market but takes in most of the London
insurance company market as well.

In the European context, reinsurers have an electronic network
system, Rinet, to streamline the handling of business. The system will
have a pilot test this fall involving 17 insurers across Europe.

Standardized accounting information and electronic mail will be
exchanged between the participants, including Munich Re, Swiss Re,
Skandia and Mercantile and General. Rinet is also in discussions with
Limnet about interconnection and hopes this can be achieved in the early
1990s. The more than 70 members of Rinet include 15 of the top 20
European reinsurance companies.

The idea of a new insurance and reinsurance bourse, a potential
rival to Lloyd's and the Institute of London Underwriters, has been
incubating for little more than a year. In the past 12 months, the idea
has progressed from a proposal for a reinsurance bourse largely made up
of small- and medium-sized London companies to a non-marine insurance
and reinsurance exchange that has the support of Britain's largest
reinsurers. Within a couple of years, London will almost certainly have
a new insurance exchange that will rub shoulders with Lloyd's and
the Institute of London Underwriters.

Since the new exchange is in non-marine, it will not be in
competition with the ILU but will be directly competing with
Lloyd's for a wide range of business. Initially the exchange will
operate as a single marketplace, a gathering of different
companies' underwriters under one roof. The 17 companies that are
the prime backers of the exchange have each subscribed 10,000 [pounds]
and given a 100,000 [pounds] loan facility toward the building which
will eventually house them.

Meanwhile, Lloyd's, whose motto these days might justifiably
be "constant change is here to stay," continues to dream up
improvements in the hope of staying at the forefront of the world's
insurance markets. Ironically, the major problem Lloyd's faces is a
consequence of the system which makes it unique: the principle of
unlimited liability of its individual members, the people who together,
in groups, capitalize the market's syndicates. At present, there
are 12,000 of the 32,000 members whose liabilities for certain past
years of account are unquantifiable. Liabilities against the so-called
open years total at least 500 million [pounds]. Some members face
bankruptcy costs to bail out their syndicates.

Surprisingly, Lloyd's is against changing the unlimited
liability principle, presumably on the grounds that this is what gives
the market a special status in the United States and elsewhere. The idea
originated by Lloyd's is for a reinsurance company to take over the
liabilities of open years for a realistic premium. It is easy to
envisage bugbears. What, for instance, would be "a realistic
premium" for unquantifiable liabilities? Reinsurance is already
available for Lloyd's syndicates, as for anyone else, but the cost
is prohibitive for unquantifiable liabilities.

Suppose for a moment a new reinsurance vehicle is set up for the
off-loading of open years' liabilities. Surely the principle of
unlimited liability will be breached if the reinsurance mechanism works
in such a way that for all practical purposes it will become impossible
in the future for members to lose their personal fortunes. But if it
does not work in this way, what is its purpose?

Chris F. Best is the editor of Foresight, a London-based risk
management and insurance journal published by Risk and Insurance Group
Limited.

COPYRIGHT 1989 Risk Management Society Publishing, Inc.
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